April 29, 2014

Some Conservatives Say Income Inequality Is a Good Thing. The Evidence Suggests Otherwise.

In his new book Capital in the Twenty-First Century, French economist Thomas Piketty believes he has found “the central contradiction of capitalism”: that wealth will inevitably become more and more concentrated among the upper class. Conservatives are predictably skeptical. The Federalist’s Ben Domenech, for instance, argued last Wednesday that Piketty’s theory, if true, is not a flaw in capitalism:

“The left continues to operate on an a priori assumption that income inequality/wealth concentration is a bad thing, because of those riches backstroking through their money. But that’s just a jealousy trope. Upon closer inspection, you’ll see that income inequality and wealth concentration don’t inhibit economic mobility; they don’t inhibit economic growth; and they are not detrimental to democracy or to human liberty.”

Domenech's piece is notably lacking in links and citations in support of his argument, but he strikes upon an interesting question. We know that income inequality is rising, but is that good or bad? Here's how inequality affects various parts of society.

Economic Growth

Economists have long argued that there is a tradeoff between robust economic growth and equal income distribution. The more government intervenes to spread out income, the theory goes, the more it reduces growth. Jared Bernstein, a left-leaning economist at the Center for Budget and Policy Priorities and the former chief economist to Vice President Joe Biden, concluded in a paper last December that “there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth.”

Nevertheless, Bernstein cited multiple channels by which rising inequality may hurt growth: the promotion of credit bubbles, diminished opportunity for the lower and middle class to build human capital, and concentrated wealth exerting undue influence over the political system. Bernstein cannot find ironclad evidence to confirm these theories, but that doesn’t prove them false either. “There is no smoking gun,” Bernstein writes, “but recent work, both theoretical and empirical, reveals potential linkages between high levels of inequality that appear to have interacted with underregulated financial markets, contributing to overleveraging, the housing bubble, the Great Recession, and its aftermath.”

A recent study by the International Monetary Fund found that societies with lower inequality are correlated “with faster and more durable growth” and that “redistribution appears generally benign in terms of its impact on growth.” This finding runs contrary to the traditional economic theory that greater redistribution hurts growth. But if that’s not the case, then that conservative argument falls apart. Poll after poll has shown that Americans disapprove of the current income distribution in the United States. If there is no tradeoff between growth and equality, we can fix that.

Social Mobility

Greg Duncan and Richard Murnane, in their 2011 Russell Sage Foundation volume Wither Opportunity?, found a growing gap in “enrichment expenditures”—the amount of money parents spend on their kids to build human capital—between the top and bottom quintiles. While college completion rates have increased for students at all income levels, the gap between the top and bottom is widening.

These growing gaps may make it harder for low-income kids to move into upper income brackets during their lifetime, though that hasn’t showed up in the academic evidence so far. A recent study from Harvard economist Raj Chetty and four co-authors found that economic mobility is unchanged since the 1970s. These forces haven’t led to decreased mobility, but that could change in the future. And, ultimately, our goal is to increase mobility.

Health Outcomes

Rising inequality is often associated with worse health outcomes. In a 2012 paper, Ohio State University researcher Hui Zheng determined that increased inequality leads to rising mortality rates five years later. But Zheng could not determine causality in his study. Furthermore, conservatives often point to poverty rather than inequality as a driver of negative health outcomes for the poor. For instance, as economists Atif Mian and Amir Sufi noted on their blog last week, life expectancy gains between 1980 and 2000 accumulated almost entirely to the rich. We can use redistributive policies to lift low-income Americans above the poverty line. Conservatives have often responded to such proposals by arguing that those policies would reduce growth and eventually hurt the very people liberals are trying to help. But as the recent IMF paper shows, the economic consensus is quickly moving in a different direction.

Political Favors

“The real inequality problem is that of the Two Americas: not divided between one that is rich and one that is poor, but between one that is protected by government and another is punished by it," Domenech wrote. "It’s a class war, yes, but not along economic lines — instead, it runs along the lines of the unprotected vs. the protected. The protected ruling class, thanks to its friends and cronies in government, gets the most lucrative opportunities with the least amount of risk, while the unprotected working class gets the opportunity to pay, via taxes, for the bailouts, subsidies, and rigging of the rules which largely run against their interests.”

How does Domenech think the protected class earns its status? In a paper this month, economists Martin Gilens and Benjamin Page found “that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence.” The majority of time, the middle and upper classes share the same stance on policy issues. When they diverge, though, the rich and business groups are more influential.

Domenech spends a large amount of his piece invoking the idea that what economists refer to as income inequality, Main Street refers to as life. “In any society, what you earn over the course of your life is unequal to others and ought to be unequal to others because you are not others, you are you,” he writes. “Your earnings will be unequal to that of others, because you are a different person with different skills and different work ethic and different priorities.” This is a straw-man argument. Liberals are not arguing for an economy of equal outcomes. But they do support a society where everyone has an equal opportunity to succeed. Government should strive to ensure that everyone has a fair chance—whether that be to move up the income ladder, live a long and healthy life, or offer their kids a high-quality education. For too many right now, those goals are out of reach.